According to Morningstar head of equities Mathew Hodge, the Australian market has never been so cheap – with the exception of the equity selloff during the pandemic and the global financial crisis.

On Morningstar’s numbers, the market is now 13% undervalued. My colleague Mark LaMonica recently published his take on the current market environment. 

Price to fair value

Timing the market is tricky but this price-to-fair value chart provides a useful guide to when the market is actually cheap. However, as Hodge reminds us, time in the market remains key.

According to Hodge, the time seems ripe for investors to look at some quality stocks for their portfolio.

Here, investors need to look for businesses underpinned by a moat, low levels of uncertainty and a strong balance sheet.

These stocks are also found in Morningstar’s monthly Best Ideas list. Recently Morningstar hosted a webinar and uncovered two such quality businesses.

Domino’s Pizza (ASX: DMP)

Domino’s is a high-quality business with a great brand. It has successfully scaled its operations by continually reinvesting in its business. It’s also a growth story, according to Morningstar director of equity research Johannes Faul.

It might not appeal to a pizza aficionado’s taste, but Domino’s now dominates in key global markets as highlighted in the chart below. Indeed, it’s the only fast-food eatery that also operates successfully in the upper Blue Mountains of New South Wales.

Dominos key markets

According to Faul, it’s not only the brand that resonates with consumers but also its value proposition of providing consistently good pizzas that drives repeat customers. “In all markets, customers know what they are getting”.

The business is currently trading at less than Morningstar’s fair value estimate and according to Faul this is because the market has concerns about how Domino’s will manage its margins amid high costs. “Domino’s sales growth has been volatile, and the share price tends to reflect near-term trading conditions rather than longer-term potential,” he says.

“The near-term outlook is uncertain and hinges on a moderation in elevated inflation. However, we believe the market is overly discounting Domino’s intact and significant long-term growth potential.”

Consistent with its growth outlook, Faul forecasts the network to grow to 6,200 stores by fiscal 2033, up from some 3,800 as of June 2023. The assessment is below management’s long-term target of 7,100. If the pizza giant hits its target that would lift Morningstar’s valuation by 11%.

Santos (ASX: STO)

With the renewable energy transition underway, one may question what value would an “old dirty company” have in this world. It is indeed a question Morningstar senior equity analyst Mark Taylor is prepared to answer.

The market may also be penalising Santos on concerns about whether it can roll out its development projects.

“We think Santos is not being sufficiently credited for new oil and gas developments underway, and the shares are cheap,” Taylor says.

“A solid balance sheet and low costs, including a freight advantage to Asia, mean the company is well placed to weather any cyclical low prices,” he adds.

For Taylor, crude and LNG prices are strong now and gas has a growing role to fuel the world, including to complement increasing renewable energy production.

Taylor is also confident on the outlook of its development projects with “continued progress on development projects pleasing”.